International Economics & Business

PROJECT ON Foreign Direct Investment (FDI) & Foreign Institutional Investment (FII)

SUBMITTED TO: Dr. Mahima Sharma

SUBMITTED BY:

Ambikesh Chauhan (JIML11-) Ankit Kumar (JIML-11-20) Ankit Sinha (JIML-11-)

Ankush Sharma (JIML-11028 Aprajita Saxena (JIML-11034) Akanksha Singh (JIML-11FS004)

ACKNOWLEDGEMENT
The satisfaction and euphoria that accompany the successful completion of any work would be incomplete unless we mention some of the persons, as an expression of gratitude, which made it possible, whose constant guidance and encouragement served as a beckon light and crowned the efforts and success. We take this opportunity of expressing our gratitude to Prof. Mahima Sharma who has always been of immense help during the making of this project, which helped us a great deal in enhancing our knowledge by virtue of practical application. Her guidance and support carried us all through the preparation of this project.

INTRODUCTION
Foreign investment refers to investments made by the residents of a country in the financial assets and production processes of another country. The effect of foreign investment, however, varies from country to country. It can affect the factor productivity of the recipient country and can also affect the balance of payments. Foreign investment provides a channel through which countries can gain access to foreign capital. It can come in two forms: FDI and foreign institutional investment (FII). Foreign direct investment involves in direct production activities and is also of a medium- to long-term nature. But foreign institutional investment is a shortterm investment, mostly in the financial markets. FII, given its short-term nature, can have bidirectional causation with the returns of other domestic financial markets such as money markets, stock markets, and foreign exchange markets. Hence, understanding the determinants of FII is very important for any emerging economy as FII exerts a larger impact on the domestic financial markets in the short run and a real impact in the long run. India, being a capital scarce country, has taken many measures to attract foreign investment since the beginning of reforms in 1991. India is the second largest country in the world, with a population of over 1 billion people. As a developing country, Indias economy is characterized by wage rates that are significantly lower than those in most developed countries. These two traits combine to make India a natural destination for FDI and foreign institutional investment (FII). Until recently, however, India has attracted only a small share of global FDI and FII primarily due to government restrictions on foreign involvement in the economy. But beginning in 1991 and accelerating rapidly since 2000, India has liberalized its investment regulations and actively encouraged new foreign investment, a sharp reversal from decades of discouraging economic integration with the global economy. The world is increasingly becoming interdependent. Goods and services followed by the financial transaction are moving across the borders. In fact, the world has become a borderless world. With the globalization of the various markets, international financial flows have so far been in excess for the goods and services among the trading countries of the world. Of the different types of financial inflows, the FDI and foreign institutional investment(FII)) has played an important role in the process of development of many economies. Further many developing countries consider FDI and FII as an important element in their development strategy among the various forms of foreign assistance.

The FDI and FII flows are usually preferred over the other form of external finance, because they are not debt creating, nonvolatile in nature and their returns depend upon the projects financed by the investor. The FDI and FII would also facilitate international trade and transfer of knowledge, skills and technology. The FDI and FII is the process by which the resident of one country (the source country)acquire the ownership of assets for the purpose of controlling the production, distribution and other productive activities of a firm in another country(the host country).According to the international monetary fund (IMF), FDI and FII is defined as an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of investor. The government of India (GOI) has also recognized the key role of the FDI and FII in its process of economic development, not only as an addition to its own domestic capital but also as an important source of technology and other global trade practices. In order to attract the required amount of FDI and FII it has bought about a number of changes in its economic policies and has put in its practice a liberal and more transparent FDI and FII policy with a view to attract more FDI and FII inflows into its economy. These changes have heralded the liberalization era of the FDI and FII policy regime into India and have brought about a structural breakthrough in the volume of FDI and FII inflows in the economy. In this context, this report is going to analyze the trends and patterns of FDI and FII flows into India during the post liberalization period that is 2006 to 2011 year.

Foreign direct investment: Indian scenario

Foreign Direct Investment (FDI) is permitted as under the following forms of investments

Through financial collaborations. Through joint ventures and technical collaborations. Through capital markets via Euro issues. Through private placements or preferential allotments.

Forbidden Territories FDI is not permitted in the following industrial sectors:

Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc. Retail Trading (except single brand product retailing). Lottery Business

Gambling and Betting

Business of chit fund Nidhi Company Trading in Transferable Development Rights (TDRs). Activity/sector not opened to private sector investment.

Foreign Investment through GDRs (Euro Issues) Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads. 1. Clearance from FIPB There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year. A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance. 2. Use of GDRs The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India. 3. Restrictions However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticipation of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India.

2.3 Foreign direct investments in India are approved through two routes
1. Automatic approval by RBI

The Reserve Bank of India accords automatic approval within a period of two weeks (subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI. 2. The FIPB Route Processing of non-automatic approval cases FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

Types of foreign Direct Investment: 1. Green Field Investment: Direct investment in new facilities/ expansion of existing facilities. Objective to create new production capacity and jobs, transfer technological know-how and linkages to the global market place. Leads to crowding out of local industry due to production of goods more cheaply (due to advanced technology and efficient processes) and uses up resources (labor, intermediate goods etc). Profits from production do not feed back into the local economy but to the multinationals home economy.

2. Mergers And Acquisitions: Primary type of FDI involving transfer of existing assets from local firms to foreign firms. Assets and operations of firms from different countries are combined to establish a new legal entity (Cross-border merger). Control of assets and operations is transformed to foreign company by its local affiliate company. No Long term benefits to the local economy, unlike Greenfield investment, as mostly the owners of the local firm are paid in stock from the acquiring firm.

3. Horizontal Foreign direct Investment: Investment in the same industry abroad as firm operates in at home. Horizontal FDI arises when a firm duplicates its home country based activities at the same value chain stage in a host country through FDI. 4. Vertical Foreign Direct Investment: 1. Backward Vertical Investment: Industry abroad provides inputs for a firms domestic production processes. 2. Forward Vertical Investment: Industry abroad sells the output of a firms domestic production processes.

Methods: The Foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods: By Incorporating a wholly owned subsidiary or company. By acquiring shares in an associated enterprise. Through a merger or an acquisition of an unrelated enterprise. Participating in an equity joint venture with another investor or enterprise.

Advantages of Foreign Direct Investment: Inflow of equipment and technology. Competitive advantage and innovation. Financial Resources for expansion. Employment generation. Contribution to Exports Growth. Access to global market place for domestic players. Access to low cost resources for investor. Access to new market/ distribution channel for products. Improved consumer welfare through reduced costs wider choice and improved quality.

Disadvantages of Foreign Direct Investment: Crowding of Local Industry. Loss of control. Repatriation of profits /dividend by investor. Conflicts of codes/laws.

Possible exploitation of resources + material wages. Effect on local culture/sentiments social culture effect.s Effect on natural environment.

Why is FDI important for any consideration of going global?

The simple answer is that making a direct foreign investment allows companies to accomplish several tasks: 1. Avoiding foreign government pressure for local production. 2. Circumventing trade barriers, hidden and otherwise. 3. Making the move from domestic export sales to a locally-based national sales office. 4. Capability to increase total production capacity. 5. Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc.

A more complete response might address the issue of global business partnering in very general terms. While it is nice that many business writers like the expression, think globally, act locally, this often used clich does not really mean very much to the average business executive in a small and medium sized company. The phrase does have significant connotations for multinational corporations. But for executives in SMEs, it is still just another buzzword. The simple explanation for this is the difference in perspective between executives of multinational corporations and small and medium sized companies. Multinational corporations are almost always concerned with worldwide manufacturing capacity and proximity to major markets. Small and medium sized companies tend to be more concerned with selling their products in overseas markets. The advent of the Internet has ushered in a new and very different mindset that tends to focus more on access issues. SMEs in particular are now focusing on access to markets, access to expertise and most of all access to technology.

Investment Risks In India

Soverein Risk India is an effervescent parliamentary democracy since its political freedom from British rule more than 50 years ago. The country does not face any real threat of a serious revolutionary movement which might lead to a collapse of state machinery. Sovereign risk in India is hence nil for both

"foreign direct investment" and "foreign portfolio investment." Many Industrial and Business houses have restrained themselves from investing in the North-Eastern part of the country due to unstable conditions. Nonetheless investing in these parts is lucrative due to the rich mineral reserves here and high level of literacy. Kashmir on the northern tip is a militancy affected area and hence investment in the state of Kashmir are restricted by law.

Political Risk India has enjoyed successive years of elected representative government at the Union as well as federal level. India suffered political instability for a few years in the sense there was no single party which won clear majority and hence it led to the formation of coalition governments. However, political stability has firmly returned since the general elections in 1999, with strong and healthy coalition governments emerging. Nonetheless, political instability did not change India's bright economic course though it delayed certain decisions relating to the economy. Economic liberalization which mostly interested foreign investors has been accepted as essential by all political parties including the Communist Party of India. Though there are bleak chances of political instability in the future, even if such a situation arises the economic policy of India would hardly be affected.. Being a strong democratic nation the chances of an army coup or foreign dictatorship are minimal. Hence, political risk in India is practically absent. Commercial Risk Commercial risk exists in any business ventures of a country. Not each and every product or service is profitably accepted in the market. Hence it is advisable to study the demand / supply condition for a particular product or service before making any major investment. In India one can avail the facilities of a large number of market research firms in exchange for a professional fee to study the state of demand / supply for any product. As it is, entering the consumer market involves some kind of gamble and hence involves commercial risk Risk Due To Terrorism In the recent past, India has witnessed several terrorist attacks on its soil which could have a negative impact on investor confidence. Not only business environment and return on investment, but also the overall security conditions in a nation have an effect on FDI's. Though some of the financial experts think otherwise. They believe the negative impact of terrorist attacks would be a short term phenomenon. In the long run, it is the micro and macro economic conditions of the Indian economy that would decide the flow of foreign investment and in this regard India would continue to be a favorable investment destination.

The Strategic Logic behind FDI

Resources seeking
Looking for resources at a lower real cost.

Market seeking
Secure market share and sales growth in target foreign market.

Efficiency seeking
Seeks to establish efficient cultures, policies, or markets. structure through useful factors,

Strategic asset seeking

Seeks to acquire assets in foreign firms that promote corporate longterm objectives.

Enhancing Efficiency from Location Advantages

Location advantages - defined as the benefits arising from a host
countrys comparative advantages. - Better access to resources Lower real cost from operating in a host country Labor cost differentials Transportation costs, tariff and non-tariff barriers Governmental policies

Improving Performance from Structural Discrepancies Structural discrepancies are the differences in industry structure
attributes between home and host countries. Examples include areas where: Competition is less intense Products are in different stages of their life cycle Market demand is unsaturated There are differences in market sophistication

Increasing Return from Ownership Advantages

Ownership Advantages come from the application of proprietary

tangible and intangible assets in the host country. Reputation, brand image, distribution channels Technological expertise, organizational skills, experience

Core competence skills: within the firm that competitors cannot easily
imitate or match. Ensuring Growth from Organizational Learning: MNEs exposed to multiple stimuli, developing: Diversity capabilities Broader learning opportunities Exposed to: New markets New practices New ideas New cultures New competition

The Impact of FDI on the Host Country

Employment
Firms attempt to capitalize on abundant and inexpensive labor. Host countries seek to have firms develop labor skills and sophistication. Host countries often feel like least desirable jobs are transplanted from home countries. Home countries often face the loss of employment as jobs move

FDI Impact on Domestic Enterprises

Foreign invested companies are likely more productive than local competitors. The result is uneven competition in the short run, and competency building efforts in the longer term. It is likely that FDI developed enterprises will gradually develop local supporting industries, supplier relationships in the host country. FDI Policy in India FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change in sectoral policy / sectoral equity cap is

notified from time to time through Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy announcement by SIA are subsequently notified by RBI under FEMA. All Press Notes are available at the website of Department of Industrial Policy & Promotion. FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. The investors are required to notify the Regional office concerned of RBI of receipt of inward remittances within 30 days of such receipt and will have to file the required documents with that office within 30 days after issue of shares to foreign investors. The Foreign direct investment scheme and strategy depends on the respective FDI norms and policies in India. The FDI policy of India has imposed certain foreign direct investment regulations as per the FDI theory of the Government of India. These include FDI limits in India for example:
o

Foreign direct investment in India in infrastructure development projects excluding arms and ammunitions, atomic energy sector, railways system , extraction of coal and lignite and mining industry is allowed upto 100% equity participation with the capping amount as Rs. 1500 crores. FDI figures in equity contribution in the finance sector cannot exceed more than 40% in banking services including credit card operations and in insurance sector only in joint ventures with local insurance companies. FDI limit of maximum 49% in telecom industry especially in the GSM services

Government Approvals for Foreign Companies Doing Business in India Government Approvals for Foreign Companies Doing Business in India or Investment Routes for Investing in India, Entry Strategies for Foreign Investors India's foreign trade policy has been formulated with a view to invite and encourage FDI in India. The Reserve Bank of India has prescribed the administrative and compliance aspects of FDI. A foreign company planning to set up business operations in India has the following options:

Investment under automatic route; and Investment through prior approval of Government.

Investment by way of Share Acquisition A foreign investing company is entitled to acquire the shares of an Indian company without obtaining any prior permission of the FIPB subject to prescribed parameters/ guidelines. If the acquisition of shares directly or indirectly results in the acquisition of a company listed on the stock exchange, it would require the approval of the Security Exchange Board of India. New investment by an existing collaborator in India
A foreign investor with an existing venture or collaboration (technical and financial) with an Indian partner in particular field proposes to invest in another area, such type of additional investment is subject to a prior approval from the FIPB, wherein both the parties are required to participate to demonstrate that the new venture does not prejudice the old one.

FDI In Small Scale Sector (SSI) Units A small-scale unit cannot have more than 24 per cent equity in its paid up capital from any industrial undertaking, either foreign or domestic. If the equity from another company (including foreign equity) exceeds 24 per cent, even if the investment in plant and machinery in the unit does not exceed Rs 10 million, the unit loses its small-scale status and shall require an industrial license to manufacture items reserved for small-scale sector. See also FDI in Small Scale Sector in India Further Liberalized SECTOR-WISE FDI INFLOWS FROM APRIL 2000 TO JANUARY 2012.

Sr. N o.

Sector/Activity

Amount of FDI Inflows (In Rs crore) (In US$ million)

1 2 3 4

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Services sector Telecommunications Computer software & hardware Housing & real estate (including cineplex, multiplex, integrated townships & commercial complexes etc.) Construction activities Drugs & pharmaceuticals Power Automobile industry Metallurgical industries Petroleum & natural gas Chemicals (other than fertilizers) Hotel & tourism Trading Electrical equipments Information & broadcasting (including print media) Cement and gypsum products Miscellaneous mechanical & engineering industries Consultancy services Industrial machinery Ports Agriculture services Food processing industries Non-conventional energy Hospital & diagnostic centres

143,878.44 57,049.95 49,626.45 49,024.58

31,970.85 12,546.54 11,106.50 10,972.67

%age with total FDI Inflows (+) 19.99 7.84 6.94 6.86

49,440.18 42,745.26 32,798.25 29,354.31 26,287.48 14,611.84 14,703.35 14,770.58 14,131.09 12,902.14 12,062.20 11,324.88 9,787.16 8,772.22 7,590.94 6,717.37 6,912.48 6,324.11 6,142.37 5,252.56

10,867.24 9,170.24 7,214.83 6,469.53 5,909.42 3,338.75 3,244.93 3,229.48 3,126.53 2,844.75 2,632.88 2,535.43 2,180.26 1,924.54 1,664.26 1,635.08 1,445.37 1,376.99 1,324.22 1,183.04

6.79 5.73 4.51 4.04 3.69 2.09 2.03 2.02 1.95 1.78 1.65 1.58 1.36 1.20 1.04 1.02 0.90 0.86 0.83 0.74

25 26 27 28 29 30 31

32 33 34 35 36 37 38 39 40 41 42

43 44 45 46 47 48

49 50 51 52 53

Electronics Textiles (including dyed,printed) Sea transport Fermentation industries Mining Paper and pulp (including paper products) Prime mover (other than electrical generators) Medical and surgical appliances Ceramics Education Rubber goods Air transport (including air freight) Machine tools Soaps, cosmetics & toilet preparations Diamond, gold ornaments Vegetable oils and vanaspati Fertilizers Printing of books (including litho printing industry) Railway related components Commercial, office & household equipments Agricultural machinery Glass Earth-moving machinery Tea and coffee (processing & warehousing coffee & rubber) Photographic raw film and paper Industrial instruments Leather, leather goods and pickers Retail trading (single brand) Boilers and steam

5,214.60 5,036.27 4,992.35 4,480.65 4,042.33 3,554.22 2,801.95

1,151.07 1,104.54 1,100.78 1,022.15 937.90 764.00 599.13

0.72 0.69 0.69 0.64 0.59 0.48 0.37

2,421.14 2,171.84 2,306.13 2,124.88 1,924.46 1,950.99 1,934.00 1,505.37 1,300.77 1,196.78 1,110.39

514.08 503.79 491.99 454.47 431.20 428.94 411.34 334.31 276.56 255.35 244.28

0.32 0.31 0.31 0.28 0.27 0.27 0.26 0.21 0.17 0.16 0.15

1,058.18 1,026.70 903.70 806.00 728.90 451.11

234.76 225.85 200.32 176.20 167.33 100.26

0.15 0.14 0.13 0.11 0.10 0.06

269.26 304.26 267.90 204.07 201.86

66.54 65.95 59.60 44.45 41.77

0.04 0.04 0.04 0.03 0.03

generating plants Sugar 54 Timber products 55 Coal production 56 Scientific instruments 57 Dye-stuffs 58 Glue and gelatin 59 Defence industries 60 Coir 61 Mathematical, surveying and 62 drawing instruments Miscellaneous industries 63 Sub. Total Rbis- nri schemes (200064 2002) Grand total

174.64 173.56 103.11 96.78 84.86 70.56 17.68 9.56 5.05 33,596.67 722,833.70 533.06 723,366.76

39.56 36.17 24.78 21.21 19.00 14.55 3.72 2.02 1.27 7,487.61 159,973.12 121.33 160,094.45

0.02 0.02 0.02 0.01 0.01 0.01 0.00 0.00 0.00 4.68 -

Analysis of share of top ten investing countries FDI equity in flows

Cumulative amount of FDI inflows (From Apr. 2000 to January 2012): Rs. 604984 crore.

Rank Country s

Cumulative inflows (from From Apr. 2000 to January 2012) Amount Rupees in crore.

%age with total inflows (in terms of rupees)

1. 2. 3. 4. 5. 6.

MAURITIUS SINGAPORE JAPAN U.S.A UNITED KINGDOM NETHERLANDS

284,381.33 72,896.07 56,768.89 46,879.97 41,916.29 31,113.64

47 12 9 7.7 7 5.14

7. 8. 9. 10.

CYPRUS GERMANY FRANCE UAE

28,325.75 20,048.46 12,447.23 10,206.48 604984.11

4.6 3.3 2 1.6 100

TOTAL FDI INFLOWS Foreign investors have begun to take a more active role in the Indian economy in recent years. By country, the largest direct investor in India is Mauritius; largely because of the India-Mauritius double-taxation treaty. Firms based in Mauritius invested 79162 crores in India between April 2000 to March 2012, equal to 47 percent of total FDI inflows. The second largest investor in India is the Singapore, with total capital flows of 72896 crore during the 2000 to 2012 periods, followed by the Japan, USA and United Kingdom.

FOREIGN INSTITUTIONAL INVESTMENT Introduction to FII Since 1990-91, the Government of India embarked on liberalization and economic reforms with a view of bringing about rapid and substantial economic growth and move towards globalization of the economy. As a part of the reforms process, the Government under its New Industrial Policy revamped its foreign investment policy recognizing the growing importance of foreign direct investment as an instrument of technology transfer, augmentation of foreign exchange reserves and globalization of the Indian economy. Simultaneously, the Government, for the first time, permitted portfolio investments from abroad by foreign institutional investors in the Indian capital market. The entry of FIIs seems to be a follow up of the recommendation of the Narsimhan Committee Report on Financial System. While recommending their entry, the Committee, however did not elaborate on the objectives of the suggested policy. The committee only suggested that the capital market should be gradually opened up to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all the securities traded on the primary and secondary markets, including shares, debentures and warrants issued by companies which were listed or were to be listed on the Stock Exchanges in India. While presenting the Budget for 1992-93, the then Finance Minister Dr. Manmohan Singh had announced a proposal to allow reputed foreign investors, such as Pension Funds etc., to invest in Indian capital market. I. Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside India which proposes to make investment in India in securities. A Working Group for Streamlining of the Procedures relating to FIIs, constituted in April, 2003, inter alia, recommended streamlining of SEBI registration procedure, and suggested that dual approval process of SEBI and RBI be changed to a single approval process of SEBI. This recommendation was implemented in December 2003. Currently, entities eligible to invest under the FII route are as follows: i) As FII: Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or with no single investor holding more than 10 per cent of the shares or units of the fund. ii) As Sub-accounts: The sub account is generally the underlying fund on whose behalf the FII invests. The following entities are eligible to be registered as sub-accounts, viz. partnership firms, private company, public company, pension fund, investment trust, and individuals. FIIs registered with SEBI fall under the following categories: FIIs- those who are required to invest not less than 70 % of their investment in equity-related instruments and 30 % in non-equity instruments. 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset management companies, nominee companies and incorporated/institutional portfolio managers or their power of attorney holders (providing discretionary and non-discretionary portfolio management services) to be registered as FIIs. While the guidelines did not

have a specific provision regarding clients, in the application form the details of clients on whose behalf investments were being made were sought. While granting registration to the FII, permission was also granted for making investments in the names of such clients. Asset management companies/portfolio managers are basically in the business of managing funds and investing them on behalf of their funds/clients. Hence, the intention of the guidelines was to allow these categories of investors to invest funds in India on behalf of their 'clients'. These 'clients' later came to be known as sub-accounts. The broad strategy consisted of having a wide variety of clients, including individuals, intermediated through institutional investors, who would be registered as FIIs in India. FIIs are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme. Prohibitions on Investments: FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities: Business of chit fund Nidhi Company Agricultural or plantation activities Real estate business or construction of farm houses (real estate business does not include development of townships, construction of residential/commercial premises, roads or bridges). o Trading in Transferable Development Rights (TDRs). o o o o Trends of Foreign Institutional Investments in India. Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds. Before 1992, only NonResident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India. Thereafter, the Indian stock markets were opened up for direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and the secondary market including the equity and other securities/instruments of companies listed/to be listed on stock exchanges in India. It can be observed from the table below that India is one of the preferred investment destinations for FIIs over the years. As of March 2009, there were 1609 FIIs registered with SEBI.

FII trends in India

Year

Gross Purchases (a) (Rs. crore)

Gross Sales (b) (Rs.crore)

Net Investmen t (a-b) (Rs. crore)

% increase in FII inflow

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

17 5593 7631 9694 15554 18695 16115 56856 74051 49920 47061 144858 16953 346978 520508 896686 548876 -

4 466 2835 2752 6979 12737 17699 46734 64116 41165 44373 99094 171072 305512 489667 844504 594608 -

13 5127 4796 6942 8575 5958 1584 10122 9935 8755 2688 45764 45881 41466 30841 52182 -45732 -

39338.46 -6.45 44.75 23.52 -30.52 126.59 739.02 -1.85 -11.88 69.30 1602.53 0.26 -9.62 -25.62 69.20 187.64 -

Difference between FDI and FII

Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country. On the contrary, FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation.In FII; the companies only need to get registered in the stock exchange to make investments. But FDI is quite different from it as they invest in a foreign nation. The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back. But in Foreign Direct Investment, this is not possible. In simple words, FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. This difference is what makes nations to choose FDIs more than then FIIs. FDI is more preferred to the FII as they are considered to be the most beneficial kind of foreign investment for the whole economy. Specific enterprise. It aims to increase the enterprises capacity or productivity or change its management control. In an FDI, the capital inflow is translated into additional production. The FII investment flows only into the secondary market. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise.The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor. FDI not only brings in capital but also helps in good governance practices and better management skills and even technology transfer. Though the Foreign Institutional Investor helps in promoting good governance and improving accounting, it does not come out with any other benefits of the FDI. While the FDI flows into the primary market, the FII flows into secondary market. While FIIs are short-term investments, the FDIs are long term. 1. FDI is an investment that a parent company makes in a foreign country. On the contrary, FII is an investment made by an investor in the markets of a foreign nation. 2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter andexiteasily. 3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availabilityingeneral. 4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor Comparison between Foreign Direct Investment and Foreign Institutional Investment:

Foreign Direct Investment(FDI) 1. Direct investment by a

Foreign Investment(FII) 1. Investment

Institutional in the

controlling parent enterprise located in an economy other than where parent enterprise is based.

capital/debt stock of company/government securities by an investor that is from or registered in country outside of the one in which it is investing. 2. Includes hedge funds, insurance, pension funds and mutual funds. 3. Short term investment (generally) made under portfolio management to earn profits from valid appreciation. 4. SEBI registration is required to operate as an FII in India.

2. Investment by any corporation that proposes to carry out business in the country other than its own. 3. Long term and direct investment in plant and machinery aimed to carry out/expand business in the affiliates country. 4. Regulated by RBI and FIPB( Foreign investment promotion board) of the department of commerce under ministry of finance. 5. Sector specific limits prescribed for FDI under automatic /approval route.

5. Aggregate investment ceiling for FII investment is 10% (5% for single) of the paid up capital of a company (up to 24%) in case of listed Indian under a general body resolution.

CONCLUSION A large number of changes that were introduced in the countrys regulatory economic policies heralded the liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the volume of the FDI inflows into the economy maintained a fluctuating and unsteady trend during the study period. It might be of interest to note that more than 50% of the total FDI inflows received by India , came from Mauritius, Singapore and the USA.

The main reason for higher levels of investment from Mauritius was that the fact that India entered into a double taxation avoidance agreement (DTAA) with Mauritius were protected from taxation in India. Among the different sectors, the service sector had received the larger proportion followed by computer software and hardware sector and telecommunication sector. According to findings and results, we have concluded that FII did have significant impact on Sensex but there is less co-relation with Banker and IT. One of the reasons for high degree of any linear relation can also be due to the sample data. The data was taken on monthly basis. The data on daily basis can give more positive results (may be). Also FII is not the only factor affecting the stock indices. There are other major factors that influence the bourses in the stock market.